Senate inquiry into ASIC’s performance

The Senate Economic Reference Committee yesterday afternoon released a highly critical review of ASIC’s performance, labelling ASIC a “timid, hesitant regulator” who had missed or ignored “clear and persistent early warning signs of corporate wrongdoing”. The Committee also urged ASIC to consider how its performance can be improved and to fulfill its responsibilities and obligations more effectively.

The Committee’s Final Report runs to 553 pages and includes 61 recommendations aimed at increasing the scope and power of ASIC’s enforcement activities and demanding stronger scrutiny by the regulator. We explain the 4 biggest changes that will affect you, below.

Aggressive approach to enforcement

The Committee recommended that ASIC take a significantly more aggressive approach to enforcement. The Report argues that ASIC must be “respected and feared” and their enforcement actions should result in a culture of compliance.

The Committee made the following recommendations to strengthen ASIC’s enforcement role:

  • Increase penalties: Establish an inquiry into the adequacy of the civil and criminal penalties currently available to ASIC and a separate inquiry into the civil penalties for breaches of directors’ duties under the Corporations Act.
  • Enforcement approach: ASIC is too reliant on settlements and enforceable undertakings, which creates a perception that ASIC is soft on the “big end of town”. If enforceable undertakings are used in the future they must have stronger terms, and ASIC must be more transparent and vigilant about monitoring companies’ compliance.
  • Pursue large cases: ASIC must be more willing to litigate complex matters involving large entities. ASIC’s enforcement special account should be increased to enable this.

Encouragement of whistleblowing

The Committee made several recommendations to update and expand the protections afforded to corporate whistleblowers. These include expanding the current definition of a whistleblower and increasing the penalties for reprisals against a whistleblower. Further, it is recommended that the requirement that a whistleblower must act in good faith be removed and replaced with a requirement that the disclosure be based on an honest belief, on reasonable grounds, of wrongdoing or shows or tends to show wrongdoing regardless of what the whistleblower believes.

The Committee also called for a review of Australia’s current framework for protecting corporate whistleblowers. As part of this review it asked the Government to explore options for reward-based incentives for corporate whistleblowers (which could possibly involve a whistleblower receiving part of the penalty imposed in a successful prosecution).

Focus on the financial services sector

The Report had a particular focus on the financial services sector, using the scandal surrounding the Commonwealth Financial Planning Limited, part of the Commonwealth Bank, as a lesson for the entire industry. In relation to the Commonwealth Bank, the Committee recommended that the government establish an independent inquiry, such as a judicial inquiry or royal commission, to examine the actions of the Commonwealth Bank.

The Committee wants to significantly lift the professional, ethical and educational standards in the sector. The Report’s recommendations include a national exam for all financial advisers, requiring all financial advisers and planners to be licensed and members of a regulator-prescribed professional association and strengthening the banning provisions under the licensing regime.

It also recommended that ASIC undertake intensive surveillance of other financial advice businesses.

Corporate insolvency laws

The Committee also recommended that the government commission a review of Australia’s corporate insolvency laws to consider amendments intended to encourage and facilitate corporate turnarounds. In particular, the Committee was of the view that this review should consider whether features of the Chapter 11 regime in place in the United States could be adopted as part of Australia’s insolvency laws.

What will ASIC do now?

ASIC must react to the Committee’s heavy criticism, and demand that ASIC become “a far more proactive regulator”. Large companies should expect ASIC to be more proactively aggressive, and more likely to pursue litigation, rather than accept enforceable undertakings.

If you deal with ASIC, you should expect increased scrutiny of your company’s actions and that ASIC will take a harder line in relation to any breaches of the law. Ensure you are on the front foot when dealing with the regulator and seek external legal advice early.

A copy of the Review can be found here: Final Report: Performance of the Australian Securities and Investments Commission